Rate buydowns.

Temporary and permanent

Two different things share the word buydown.

• A temporary buydown lowers your rate for an initial period and then steps it up to the note rate for the rest of the loan. Money is placed in an escrow account at closing and drawn down each month to cover the difference. The note rate itself never changes.
• A permanent buydown, often called discount points, lowers the note rate for the whole life of the loan in exchange for a cost paid at closing.

Why a seller would rather buy down the rate

A seller who cuts the price reduces what they net and moves your payment only slightly. The same money applied to a buydown moves your payment considerably more in the early years, and it keeps the recorded sale price up — which matters to the seller, to the appraisal, and to the neighbors’ comparables.

Builders use this constantly, and it is often the single most valuable thing in a builder’s incentive package. If you are buying new construction, ask what the builder will do on financing before you negotiate on price.

Things worth knowing

• You are qualified at the note rate, not at the reduced starting rate. The buydown makes the early years easier; it does not stretch what you can borrow.
• The step-up is scheduled and known from the day you close. There is no surprise in it, but you should plan for it.
• If you refinance or sell before the escrow is exhausted, unused buydown funds are generally credited to the loan rather than lost.
• Who is allowed to pay for it, and how much they may contribute, varies by program and by occupancy.

Questions people ask

Can I pay for the buydown myself?

On a temporary buydown, generally no — these are typically funded by a seller, builder or lender credit. A permanent buydown through discount points is something a borrower can pay for.

Is it better than a lower price?

It depends on how long you keep the loan. A buydown front-loads the benefit; a price cut spreads it across the whole term. Ask a loan officer to run both against your actual numbers rather than guessing.

Does it work on any loan?

Availability varies. Buydowns are common on conventional, FHA and VA purchases and less common elsewhere.

Program availability varies by state, by program and by transaction. A licensed loan officer will confirm what is available for your situation.